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British Pound Drops To Its Lowest Against The Dollar In 37 Years

British Pound Drops To Its Lowest Against The Dollar In 37 Years
On Wednesday, the British pound fell to its lowest level against the US dollar since 1985.
In London's afternoon trade, the pound dropped to $1.1407, the lowest level in 37 years, as investors reacted to the U.K.'s deteriorating economic outlook under the leadership of a new prime minister.
At $1.1469, it was last seen trading down 0.4 per cent.
After defeating Boris Johnson in a fiercely contested leadership race, Liz Truss was sworn in as the new British prime minister on Tuesday. With inflation reaching 10.1 per cent in July, the economy she inherits is suffering from its worst cost-of-living crisis in a generation.
The pound fell to $1.1444 on Monday in the hours after her victory, but it has since fallen as traders assess the consequences of her appointment.
During the Brexit vote in 2016 and for a brief period in March 2020, sterling last dropped to $1.14. Since 1985, when Margaret Thatcher's administration was in power, the price of one dollar has not reached $1.1407.
The escalating inflation, which is now at the highest level among the G-7 countries, and the likelihood of an impending recession have taken a toll on the British pound in recent months. Concerns about the U.K. debt market have increased with the appointment of Truss, who is widely expected to reduce taxes and increase borrowing.
The risks of a "sterling crisis" should not be understated, Deutsche Bank advised on Monday, adding that investors will now be anxiously awaiting Truss' policy announcements, which are anticipated in the next few days.
“With the current account deficit already at record levels, sterling requires large capital inflows supported by improving investor confidence and falling inflation expectations. However, the opposite is happening,” Deutsche Bank FX Strategist Shreyas Gopal said in a note.
It happens at a time when the U.S. dollar has risen significantly this year due to concerns about a global recession and the Federal Reserve's aggressive interest rate hikes. This year, the value of the pound against the dollar has fallen by more than 15 per cent.
The pound was down almost 1% against the euro on Wednesday, trading at 86.83. Sterling has fared better in comparison to the euro, falling just 3 per cent for the year.
According to Refinitiv data, the lowest price at which sterling has ever traded against the US dollar was $1.052 on February 26, 1985.

Christopher J. Mitchell

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